US and European bank stocks saw significant declines on Monday as traders raced into sovereign debt, following regulators’ moves to prevent the collapse of Silicon Valley Bank from spreading into the wider economy. The Stoxx 600 was down 2.1% while the KBW Nasdaq Bank Index fell 12.2% in early trading in the US. In contrast, US markets were more muted in early trading, with the S&P 500 down 0.2% and the Nasdaq Composite flat. The European Stoxx banking index was down 6.8% as investors worried about the value of banks’ bond portfolios.
Small cap stocks were hit particularly hard, with the Russell 2000 Index losing 1.9%. Traders flocked to sovereign debt as jitters spread through the market following regulators’ moves over the weekend to insulate customers from the failure of California-based SVB and its UK arm. The yield on the two-year US Treasury note fell 0.55 percentage points to 4%, its biggest single day drop since 1987, while German 10-year Bunds fell 0.29 percentage points to 2.2%.
Investors are now increasing bets that the Federal Reserve will leave interest rates unchanged following the failure of the SVB, Silvergate and Signature banks in the last week. Investors had been pricing in a 0.5 percentage point rise after comments last week by Fed chair Jay Powell. On Tuesday, US consumer price index numbers will be released, the latest in a series of key data releases which will provide investors with clues as to the pace of the economy and probable interest rate rises.
Among US bank shares, Bank of America lost 5.6% and Citigroup fell 5.3%, while in Europe, Credit Suisse shed 13.3% and Commerzbank lost 12.1%. The UK’s Virgin Money fell 9.3%. “There’s a sense where markets are thinking that the Federal Reserve stepped in aggressively to stop problems spreading, but that doesn’t apply in Europe. Cracks are starting to appear and it’s a reminder that if rates go up that could cause problems for [banking] institutions,” said Neil Shearing, group chief economist at Capital Economics in London.
Oil also slumped, with Brent crude falling 3% to $80.31 per barrel and WTI, the US equivalent, dropping 3.3% to $74.04 per barrel. The dollar dropped 0.6% against a basket of other currencies during morning trading while the pound rose 0.5% against the dollar. Equities in Asia were mixed, with Japan’s Topix losing 1.5%, Hong Kong’s Hang Seng index rising 2%, and mainland China’s CSI 300 rising 1.1% on Monday.
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